Economy: China needs further reforms to make growth sustainable, greener and more inclusive

The latest OECD Economic Survey of China looks at the factors behind the economic slowdown as well as policies that can boost the quality of future growth and ensure that it is more equitably distributed, writes the OECD.

Despite the slowdown, the Survey projects growth above 6% this year and next, and sees continuing convergence with more advanced economies. “China continues to be the major driver of world economic growth and convergence with advanced economies continues, despite the slowdown,” Mr Schuknecht said.

“Yet China is at a crossroads, facing serious domestic and external challenges to maintaining its strong position over the long-term. Policy should seek to ensure a better functioning economy that delivers stable and inclusive growth for all.”Prudent fiscal policy should channel funds to areas where returns are highest, such as education, health and social security systems, while avoiding misallocation of capital by allowing banks to better price risks.

Risk perception could be sharpened by orderly defaults. The quality, coverage and timeliness of fiscal reporting can be improved, the Survey said.The Survey sees wide scope to improve efficiency across the economy, notably by reducing the internal barriers that hinder product market competition and labour mobility.

Strengthening the rule of law, restricting the power of administrative departments and providing clear and detailed implementation rules limiting their discretionary powers would reduce protectionism at the local level. Anti-monopoly rules and enforcement can be strengthened and public procurement processes could be made more transparent, technology-neutral and open to all players.To ensure equal opportunities, the Survey recommends China to distribute more evenly high-quality education and health care in order to reduce incentives to move to mega-cities.

Gradually easing restrictions on access to public services for city residents without the hukou (residency permit) and eventually delinking service provision from the hukou would also help improve equity. Centralised financing of key spending items, such as wage bills in education and health, reforms to the floor and ceiling for social security contributions and wider tax reform should be pursued..